Hedge fund strategies severely impacted by August market volatility

Market volatility, concern over slowing growth and the eurozone sovereign debt crisis hit hedge fund strategies in August. Only managed futures and global macros delivered positive returns.

Negative returns
Hedge funds lost 2.13% on average in August as markets turned volatile amid rising concerns over slowing growth and the worsening sovereign debt crisis in Europe. However, hedge funds handily outperformed the MSCI World Index, which dropped 7.7% for the month.

Long/short equity managers were severely impacted by the gyrations in global markets, losing 3.93% on average in August. Hedge funds focusing on Asia (ex-Japan) bore the brunt of losses, dropping over 5% for the month. European and Japanese managers underperformed their US counterparts, but all regional managers outperformed their respective benchmark indexes by considerable margins. The Eurekahedge Long/Short Equities Hedge Fund Index is down 3.35% year to date.

CTAs shine
Managed futures was one of only two hedge fund strategies to deliver positive returns for investors in August. CTAs were positioned for lower equity prices and a slide in the US dollar against commodity and emerging market currencies. CTAs also profited from a rally in commodities, particularly precious metals. The Eurekahedge CTA/Managed Futures Hedge Fund Index gained 0.8% in August with US managers leading the pack with a 0.61% return.

Arbitrage funds had mixed fortunes in August as profits from volatility and convertible bond trading were offset by losses in fixed income and statistical arbitrage strategies. The Eurekahedge Arbitrage Hedge Fund Index dropped 1.62% for the month.

Distressed debt managers also found the environment challenging. The strategy suffered losses of 3.36% in large part due to the poor performance of the high yield and leveraged loan markets.

Macro holds steady
Global macro funds capitalised on emerging trends in the currency and commodity markets to record a positive return of 0.19% for August. Positions in precious metals and agricultural commodities were particularly profitable and helped mitigate the declines in global equities.

Relative value strategies were negatively hit by the heightened volatility and sharp declines in equity markets. The Eurekahedge Relative Value Hedge Fund Index was down 2.04% for the month. Market neutral funds lost 0.84% as the value of long positioned fell more than the profits on shorts. It was also a difficult month for multi-strategy funds, which lost 1.26% in August. The Eurekahedge Multi-Strategy Hedge Fund Index is currently down 0.55% year to date with the losses in August cancelling out strong returns in earlier months.

Event driven slips
The Eurekahedge Event Driven Hedge Fund Index registered losses for the fourth month in succession, dropping 3.22% in August. The strategy struggled with a fall in M&A deal volume and a rash of scrapped US IPOs compounding the general decline in markets. The Eurekahedge Event Driven Hedge Fund Index is down 2.55% year to date.

Fixed income hedge funds recorded average losses of 1.02% in August. US-focused fixed income strategies benefited from a rally in Treasuries during the month, losing only 0.55%. European managers found the environment tougher as the ongoing eurozone sovereign debt debacle contributed to heightened volatility in fixed income markets. European fixed income managers lost 1.48% in August but are still in positive territory for the year.